Why PNB's stock may not regain Street's confidence anytime soon

While Q3 numbers revealed some improvement in asset quality, the bank lags peers on this parameter

The December quarter (Q3) was a mixed bag for Punjab National Bank (PNB). The good news from the scam-hit public sector bank is that the impact of last year’s Nirav Modi fraud is fully captured. So, fresh pain from the incident is unlikely to arise. 

Moreover, the bank has returned to its profit making ways after three quarters of losses. Improvement in headline asset quality numbers is another positive takeaway. The government recently stated it won’t consider further consolidation of public sector banks (PSBs) through mergers, which also brought some relief to investors.

Yet, regaining the Street’s confidence may be tough. 

Q3 numbers suggest core operations aren’t too strong. Net interest income (NII) grew by just eight per cent year-on-year, hurting profitability or net interest margin (NIM) which shrunk by 30 basis points (bps) to 2.4 per cent. PNB is, in fact, the only PSB to witness a decline in its loan book by four per cent in Q3.

However, on a positive note, PNB’s absolute provisioning (for bad loans) reduced by 38 per cent year-on-year and 72 per cent sequentially to Rs 2,754 crore, which is the lowest in recent quarters. Secondly, slippages or fresh accretion of bad loans was contained at Rs 3,900 crore in Q3, which is also a multi-quarter low. Consequently, the slippages to loan book ratio declined to 3.5 per cent, compared to 5.5 per cent in Q2.

Gross and net non-performing assets (NPA) reduced sequentially to 16.3 per cent and 8.2 per cent respectively in Q3, down 70 – 90 basis points, but are still the highest among top PSBs. In fact, with PNB’s net NPA ratio being more than Bank of India's (BOI) (5.87 per cent in Q3), analysts feel the March quarter would be crucial. If BOI demonstrates growth and contains its NPAs reasonably, analysts say it may take an edge over PNB given its exit from the Prompt Corrective Action (PCA) framework. 

This apart, Siddhart Purohit of SMC Capital points out that with Tier-1 capital back at sub-seven per cent level, PNB may need capital infusion by the government for growth. “Much of capital infused so far has been consumed to write off loans,” he says. 

With these challenges, benign valuation of 0.7x FY20 book alone may not help PNB stock win back investors’ confidence.